Jaws, the Bank Sequel

Too-big-to-fail is morphing into bigger-than-ever swallowing up failing-faster-than-ever.

The nation's largest banks, infused with taxpayer billions, are feasting on the weak as the Washington Post reports that "no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected."

FDIC chair Sheila Bair sums it up succinctly: "It is at the top of the list of things that need to be fixed. It fed the crisis, and it has gotten worse because of the crisis."

This alarm follows news that her agency's insurance fund, which guarantees deposits, shrank another 20 percent in the second quarter, down to $10.4 billion, the lowest level since the savings and loan crisis in the early 1990s.

So far this year 81 banks have failed with another 416 on the FDIC'S "problem list."

Meanwhile, the bailout-bloated sharks are flourishing. J.P. Morgan Chase, Bank of America and Wells Fargo each now holds more than $1 of every $10 on deposit in the country. "Those three banks, plus government-rescued and -owned Citigroup," the Post reports, "now issue one of every two mortgages and about two of every three credit cards, federal data show."

As politicians debate socialized medicine, the country has moved toward a bastardized form of socialized banking, fed by the government for the ballooning profit of the few, who are squeezing out struggling smaller competitors by being able to borrow at lower interest rates while doing little to ease the consumer credit crunch, the original object of the bailout.

Now that the President has reappointed Fed chairman Ben Bernanke, the Obama economic team can get to work trying to undo some of its unintended consequences by starting to rein in superbanks with much tougher regulation.

Prudence Doesn't Pay--Much

Under all the boom-and-bust news, old-fashioned American caution and thrift still exist, but the exemplars of those virtues are not being rewarded for them.

Smaller banks across the country complain they are being tarred by stress-test results of the Citicorpses and Bank of Americas that are soaking up bailout money after turning the old-fashioned business of savings, checking accounts and loans into high-stakes gambling.

“Banking should not be exciting,” says a small-town Indiana banker. “If banking gets exciting, there is something wrong with it.”

Depositors are suffering, too. Those who have saved enough to take out certificates of deposit now find one-year rates barely averaging 1 percent as worried banks see their FDIC insurance premiums soaring to cover the cost of sobering up institutions that went on drunken-sailor sprees.

Meanwhile, back on Wall Street, buoyed by recent market gains, the fast-buck boys are starting their spiels again, a recurrence of euphoria alarming enough to turn the usually cheerful Arianna Huffington into Cassandra.

Prompted to caution by, of all people, Eliot Spitzer, Ms. Huffington recalls John Kenneth Galbraith's warnings about "the pathological weakness of the financial memory" and a "mass escape from reality" in America's past.

Prudence is getting a lot of press these days, but those who practice it aren't getting much else.

Bailout Boomerang

Taxpayer money pouring into banks has not only failed to get loans flowing but even worsened the practices of those that received it.

"The federal government," the Washington Post reports, "has invested almost $200 billion in U.S. banks over the last three months to spark new lending to consumers and businesses.

"So far, it hasn't worked. Lending has declined, and banks that got government money on average have reduced lending more sharply than banks that didn't."

In the Paulson free-money giveaway, recipients have used government funds to merge with weaker institutions, increase reserves and improve their balance sheets.

But the total volume of loans outstanding from all banks fell about 1 percent, according to Federal Reserve data, declining more than twice as much among those that accepted taxpayer money. Some of the first to get funding, such as Citigroup and J.P. Morgan Chase, have reported the sharpest drops.

An irony that emerges is that depositors are shying away from big banks seen to be in bad shape and, encouraged by the increase in FDIC protection, putting money into weaker institutions that offer higher interest rates.

In the face of this bailout boomerang, members of Congress from both parties are now looking for ways to pressure recipients into making more loans, starting with more closely tracking how banks use the money they get.

Barney Frank, chairman of the House Financial Services Committee, expects the Obama Administration to pressure banks harder to increase lending, saying the initial bailout should have come with tougher conditions. He plans to hold hearings this week to push the effort.

This dispiriting picture raises larger questions about the "too big to fail" premise of the bailouts. So far results based on that assumption with a hands-off approach by the government have not been encouraging.

Making Book on Paulson

An editor once proposed a picture book titled "They Must Know What They're Doing or They Wouldn't Be Where They Are," featuring the captain of the Titanic, the designer of the Edsel, LBJ running the Vietnam war and other disaster-prone people in high places.

Add Henry Paulson to the list. After pushing Congress into a panic to let him buy toxic mortgage assets, Bush's Treasury Secretary today said maybe not, announcing the plan is on hold.

At a news conference, Paulson said the $700 billion will be used instead to bolster the financial markets and, in turn, make loans more accessible for creditworthy borrowers:

“During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators’ actions have reinforced this lending restraint in the past.”

Four federal agencies, including the Federal Reserve and the FDIC, joined in by issuing a statement practically begging banks to step up: “Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.”

Paulson's turning on a dime is analogous to what the Bush Administration might have done five years ago if, after getting Congress to authorize invasion of Iraq and starting the shock and awe, they suddenly decided to stop and bomb Iran instead.

No wonder, in the face of all this fumbling, the stock market keeps going down, waiting for a signal about where all this confusion is heading.

The naming of Obama's Treasury Secretary, along with a clear statement of intentions about the financial markets, gets more urgent with each passing day.